Singapore Monthly Strategy - DBS Research 2017-05-04: Uplift to 3,250 (Part 1 ~ Outlook)

Singapore Monthly Strategy - DBS Vickers 2017-05-04: Uplift to 3,250 (Outlook) Stock Market Outlook STI Resistance Level STI Support Level

Singapore Monthly Strategy - Uplift to 3,250 (Outlook)

  • STI heading towards 3250 before correcting.
  • FED likely to hold rates steady this month 
  • Macron victory a non-event while a Le Pen upset win will unsettle financial markets. 
  • Optimism as 1QFY17 results season unfolds. 

Looking back at April 

  • The benchmark Straits Times Index clawed back losses to end the month at 3175
  • Investors heave a sigh of relief after round one of the French elections saw Emmanuel Macron garnered 23.75% of votes that was ahead of the 21.53% figure for nationalist Ms Le Pen. A late-month rally in US markets ahead of details on Trump’s tax plans had a positive spill over effect on global equities. 
  • The consumer services sector performed best, led by large caps ComfortDelgro, Genting Singapore and Jardine C&C
  • The O&G sector fared the worst, dragged down by a decline in oil prices on the concern that rising US inventories will offset the impact of OPEC production cuts.
  • Telco stocks also underperformed on concerns that aggressive bidding at the recent 4G spectrum auction may impact future earnings.

May Market Outlook

FED likely to hold rates steady this month 

  • The outcome of this month’s FOMC meeting is unlikely to have a major impact on equity markets. Investors well expect the FED to hold the FED funds rate steady at 1% at the FOMC meeting this week. 
  • Consensus expects just a 11% chance of a rate hike this month but this jumps to more than 70% chance at the June FOMC meeting. 
  • DBS Research continues to expect 3 (consensus 2) more rate hikes this year, lifting the FED funds rate to 1.75%.

Macron victory a non-event while a Le Pen upset win will unsettle financial markets 

  • The second round of the French presidential elections will be held on 7 May. A Macron victory is no longer a surprise as opinion polls currently show a 60% chance of that happening.
  • European equity markets have rallied and the Euro strengthened post first round results. The CAC 40 French stock market index gapped up 4% to 5269 and the Euro strengthened 1.8% against the USD in reaction to Marcon’s first round victory.
  • The recent rebound in the EURSGD from a low of 1.485 to 1.52 favoured companies with exposure to the European currency. But with high expectations of a Macron victory, the equity and currency markets may not see a repeat of the first round reaction. On the other hand, a victory for Le Pen will certainly unsettle markets.

Optimism as 1QFY17 results season unfolds 

  • The 1QFY17 results season is currently underway. YTD economic data releases pointed to an upturn in manufacturing activities and improving banks’ loans growth.
  • There is cautious optimism that the corporate earnings revision trend that turned positive for the first time in 2 years at the previous 4QFY16 results season can sustain. We currently expect earnings growth of 9.3% (FY17F) and 6.1% (FY18F) for STI stocks.
  • A quarter of companies (around 25) under our coverage have released results, largely centered on SREITs.  Earnings for SREITs were mostly in line with the exception of CDL HT, CapitaLand Retail China Trust and Ascendas REIT that were above expectations while Ascott Residence Trust was below.
  • To date, we have revised FY17F and FY18F earnings by 0.6% and 0.8% respectively on a q-o-q basis. It is a positive start but still early days into the reporting season. Stay tuned.

Straits Times Index Outlook – Heading for 3250 

  • The STI recovered from an intra-month pullback to 3114 to end back near the YTD high at 3175. The index had been largely range bound from 3100 to 3190 since early March, in line with our view of a 3050 to 3230 trading range over the past two months. 
  • While we had been ‘holding range’ over the past 2 months, we see the likelihood that STI can rise above the current near-term range in the short-term.
    • Firstly, Singapore’s economy is on the mend. The advanced 1Q GDP estimates of 2.5% stands a good chance of being revised upward on the back of the string of stronger-than-expected economic data releases. Our Singapore economist notes that the 1Q17 advance GDP estimates assumed a manufacturing growth of 6.6% (YoY) in the quarter. As it is, the sector has now expanded by 8.1%. This alone will add another 0.3ppts to the earlier GDP growth projection, which will bring it closer to his forecast of 2.9%. The services sector also fared well with the latest March bank loans and advances recovering further to 6.3% y-o-y, the highest in more than 2 years. 
    • Secondly, with the strengthening economic data points YTD, there is growing optimism that the current 2Q results season could see a continuation of the earnings recovery trend.
  • Our short-term view for the month of May is a rise above the YTD high of 3188 towards 3250 that coincides with 14.02x (+0.25SD) 12-mth forward PE based on current earnings estimates. The 3250 level is the next short-term resistance level that will lead to another consolidation. 
  • Near-term support is around the 3150 level. Short of an unexpected turn of events such as a Le Pen victory at the second round of the French presidential elections or a military conflict between North Korea and the US, we see the STI holding above the recent low of 3115.

Yeo Kee Yan CMT DBS Vickers | Janice CHUA DBS Vickers | 2017-05-04
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